India: Further reforms must ensure strong growth is long-lasting and benefits all

14/06/2011 - India’s economy has ranked among the best performers over the past decade, and poverty has been falling faster than in many other emerging economies. India now has the opportunity to move towards sustained and socially inclusive double-digit growth if the right policies are put in place, according to a new OECD report.

Presenting the Economic Survey of India in New Delhi, OECD Secretary-General Angel Gurría said: “Policymakers are to be commended on the remarkable catch-up achieved in recent years, making India one of main driving forces of the global economy.” He added: “The priority given to more socially inclusive economic growth is appropriate and further reforms are needed to achieve it.” Read speech.

To ensure strong growth continues and is sufficiently inclusive, the government needs to target public expenditure better on the poor. Although high growth has reduced poverty, progress could have been faster, the OECD says. Hundreds of millions of people still live below the official poverty line. Malnutrition and poor health are still widespread. Against this backdrop, the report advocates a strengthened welfare system and improved access to health care. Government spending on health is only around 1% of GDP - among the lowest rates in the world. Private health care provision is increasing but quality is highly variable. Better regulation and oversight is needed.

Around 9% of GDP is spent on energy and other subsidies, most of which fails to reach the poor. The report says diesel subsidies should be phased out. For other energy products, such as kerosene and LPG, susbidies should be transformed into cash payments targeted to the poorest people in society. The government needs to ensure that its plan to shift kerosene and fertiliser subsidies into direct cash transfers is implemented quickly. Here the roll-out of a Universal Identity Number will help ensure payments go to the right people.

The report welcomes the planned introduction of a nationwide goods and services tax and suggests that in order to keep the overall rate low, the base should be as wide as possible. Further fiscal consolidation is also called for, making more funds available for private investment. Cutting red tape for businesses and further lowering barriers to trade and investment will help both companies and households. The report also notes that while progress has been made to improve infrastructure, even greater investment in this area is necessary to boost growth.

Strengthening the financial system and promoting access to financial services is essential for strong and inclusive growth. The report notes that many Indians still lack access to bank accounts although microfinance is improving opportunities in many communities. The financial sector proved resilient during the global downturn but there remains scope for greater competition.

Education has been given high priority by India’s central and state governments and enrolment continues to grow fast. But high drop-out rates and low attendance remain a challenge. The report recommends more effective government regulation and funding. Incentives and professional development opportunities for teachers need to be strengthened while student loans for higher education should be more widely available.